Business interruption insurance is a vital tool in your company’s risk management toolbox. This product replaces revenue that is lost when a covered peril causes damage to your property and forces you to temporarily cease operations. Following a devastating event such as a fire or hurricane, your business interruption policy can be the only thing standing between your business and permanent closure. But it’s important to understand some of the loopholes that insurers exploit to deny claims and limit their liability.
Business interruption insurance overview
Business interruption insurance, which is also called business income insurance, is often bundled into a business owner’s policy or a commercial property insurance policy. These policies cover business interruption losses resulting from direct physical loss of or damage to insured property that was caused by a covered peril. As a policyholder, you are generally entitled to reimbursement for lost profits as well as reasonable expenses that you incur in order to continue operating during the period of interruption. The policy can be used to pay for operating expenses and fixed costs, including payroll, taxes, rent, loan payments, utilities and a temporary location if applicable. The coverage amount is calculated based on your company’s financial history, up to the policy limits.
What triggers benefits – and what doesn’t
The policy language will determine what factual circumstances are necessary to trigger business interruption coverage. Benefits are generally triggered when a covered peril causes direct physical loss of or damage to insured property and this loss or damage forces the temporary suspension of business operations. Covered perils typically include fire, wind and wind-driven rain, theft, falling objects and lightning. For instance, if you can’t open your restaurant temporarily due to damage from a fire, your policy would cover lost revenue while your restaurant is closed for repairs.
Many perils that could damage property are typically excluded, such as floods and earthquakes, which must be insured separately. Further, losses that do not constitute “direct physical loss or damage” to insured property will not be covered. For instance, when the pandemic caused thousands of businesses to close temporarily, the vast majority saw their business interruption claims denied largely because the virus did not physically alter or damage covered property. Additionally, some policies explicitly exclude viruses from coverage.
Policy language will dictate whether a full or partial cessation of business operations is required for benefits to kick in. For instance, if a hotel is damaged by a hurricane but it is able to rent out some of its rooms during the recovery period, the insurer may deny coverage because the covered peril did not cause a full suspension of operations.
Civil authority coverage: an important add-on
Many business interruption policies offer a civil authority coverage provision as an add-on. However, businesses often do not realize their policy lacks this critical endorsement until they learn about it the hard way. Civil authority coverage generally applies if a government or civil authority restricts access to your property due to the direct physical loss of or damage to neighboring property that was caused by a covered loss. For instance, if the building next to yours is damaged in a fire, and a civil authority orders the temporary closure of your building as a result, coverage would apply. When the government ordered the shutdown of many businesses during the pandemic, insurers routinely denied claims from companies seeking civil authority coverage, citing a lack of physical loss of or damage to nearby property.
The “period of restoration” trap
Insurers only cover loss of business income during the “period of restoration,” which is typically defined as the amount of time required to rebuild, repair or replace damaged or destroyed property. The period of restoration extends until the property should, with reasonable speed, be repaired or replaced so that normal operations can resume.
Businesses commonly misunderstand the restoration period parameters, assuming the period extends until they actually finish the repairs and resume full operations. But insurers will look at when your company could reasonably have gotten back up and running – which may be a lot sooner than you expect.
Many policies also have a waiting period of 48 to 72 hours before benefits kick in.
How insurers undervalue business income in claims
You will generally be reimbursed for your reduction in net income during the recovery period. As part of the claims process, you will need to provide the insurer with documentation about your business’s financial history, such as profit and loss (P&L) statements, tax returns, balance sheets, payroll records, lease agreements or mortgage statements, utility bills, and receipts or other evidence of extra expenses incurred as a result of the covered event.
Insurers may undervalue claims by using historical averages that do not account for peak seasons or recent growth trends. For instance, if your business is forced to close during the fourth quarter of the year, and that’s when you historically reap your highest sales, the insurance company may ignore this seasonal bump when calculating income.
When submitting your claim, it is important to provide compelling arguments about why your business income during the restoration period would have been higher than the historical average. Be sure to provide thorough documentation and evidence to support your position.
Why legal review is critical in business interruption claims
It may be helpful to consult an experienced insurance attorney when filing your business interruption claim. An attorney can interpret the dense legal language and policy terms and help you maximize your claim by ensuring that all eligible losses are properly included and documented. The attorney can also help you avoid claim-filing errors and missed deadlines that could cause delays or jeopardize your coverage. Further, if your insurer denies your claim or offers you a lowball settlement, the attorney can help you appeal the decision, force the insurer to negotiate or file a lawsuit if necessary.
If your business insurance company is challenging your business interruption claim, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
